Financing

Why Small Business Bank Lending Won't Rebound Soon

Small business advocates complain that banks have lost interest in making small business loans since the financial crisis. Bank executives point out that the ensuing recession curtailed loan demand. Both sides blame tougher government regulations for making small business loans harder to get.

While it’s unclear how much each of these factors weigh on the market, the total value of small business loans in the fourth quarter of 2012 was 78 percent less than in the second quarter in 2007, according to an article published yesterday by the Federal Reserve Bank of Cleveland.

The chart below, reproduced from the paper, shows the shrinking share of small loans among all nonfarm, nonresidential loans. The data are from the Federal Deposit Insurance Corp., which describes loans as “small” based on the size of the principal, not the type of business doing the borrowing.

“A combination of reduced creditworthiness, the declining value of homes (a major source of small business loan collateral), and tightened lending standards has reduced the number of small companies able to tap credit markets,” write authors Ann Marie Wiersch and Scott Shane. “This confluence of events makes it unlikely that small business credit will spontaneously increase anytime in the near future.”

The authors also list slower business growth, as well as banks’ lower profit margins on small loans, as reasons for slower lending. The paper, which dampens recent news that big banks are saying yes to more small business borrowers, suggests that the varied forces holding back small business lending pose a complex problem for policymakers seeking to goose it.